What Is a Vertical Merger?

A vertical merger is the merger of two or more companies that provide different supply chain functions for a common good or service. Most often, the merger is effected to increase synergies, gain more control of the supply chain process, and ramp up business. A vertical merger often results in reduced costs and increased productivity and efficiency.

1:06

What's a Vertical Merger?

Understanding Vertical Merger

Although the terms vertical merger and vertical integration are often used interchangeably, they are not exactly the same. Vertical integration—the expansion of operations into other stages of the supply chain process—can occur without merging two businesses. For example, with vertical integration, a ladder manufacturing company could decide to produce its own aluminum for the end product instead of purchasing it from suppliers. A vertical merger, on the other hand, would result in the manufacturing company and the supplier merging.

The opposite of a vertical merger is a horizontal merger, which involves the merger of two competing companies that produce at the same stage in the supply chain process.

Vertical mergers reduce competition and give the new single entity a larger share of the market. The success of the merger is based on whether the combined entity has more value than each firm separately.

Examples of a Vertical Merger

Another example of a vertical merger is a car manufacturer purchasing a tire company. This vertical merger could reduce the cost of tires for the automaker and potentially expand its business by allowing it to supply tires to competing automakers. This example shows how a vertical merger can be twice as beneficial to the company that's conducting the integration. Initially, the firm would benefit from reduced costs, which could lead to increased profits. A secondary benefit is an expansion in the company's revenue streams, which also could boost its bottom line

A notable vertical merger was the 1996 merger of Time Warner Inc., a major cable company, and the Turner Corporation, a major media company responsible for CNN, TNT, Cartoon Network, and TBS channels. In 2018, a merger between Time Warner and AT&T (T: NYSE) was finalized but not without intense scrutiny.

As of February 2019, as reported by the Associated Press, the "federal appeals court cleared AT&T’s takeover of Time Warner, rejecting the Trump administration’s claims that the $81 billion deal will harm consumers and reduce competition in the TV industry."

Key Takeaways

  • The purpose of a vertical merger between two companies is to heighten synergies, gain more control of the supply chain process, and increase business.
  • Anti-trust violations are often cited when vertical mergers are planned or occur because of the probability of reduced market competition.
  • Vertical mergers may result in lower costs and increased productivity and efficiency for the companies involved.

The Vertical Merger Controversy

Vertical mergers are not without controversy. Anti-trust violations are often cited when vertical mergers are planned or occur because of the probability of reduced market competition. Vertical mergers could be used to block competitors from accessing raw materials or completing certain stages within the supply chain.

Consider the example of the car manufacturer purchasing a tire manufacturer. Suppose this same car manufacturer purchased most of the tire manufacturers in the industry. It then could control the supply to the market as well as the price, thus destroying fair, or "perfect" competition. Moreover, some economists believe that vertical mergers can promote collusion among upstream firms.